This quarterly report on Form 10-Q, including documents incorporated by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934, as amended. When used in this quarterly report, the words "estimated", "anticipated", "expect", "believe", "intend" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to risks, uncertainties, and assumptions about Realty Income Corporation, including, among other things:

ˇ Our anticipated growth strategies;

ˇ Our intention to acquire additional properties and the timing of these acquisitions;

ˇ Our intention to sell properties and the timing of these property sales;

ˇ Our intention to re-lease vacant properties;

ˇ Anticipated trends in our business, including trends in the market for long-term net-leases of freestanding, single-tenant retail properties;

ˇ Future expenditures for development projects; and

ˇ Profitability of our subsidiary, Crest Net Lease, Inc. ("Crest").

Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. In particular, some of the factors that could cause actual results to differ materially are:

ˇ Our continued qualification as a real estate investment trust;

ˇ General business and economic conditions;

ˇ Competition;

ˇ Fluctuating interest rates;

ˇ Access to debt and equity capital markets;

ˇ Continued uncertainty in the credit markets;

ˇ Other risks inherent in the real estate business including tenant defaults, potential liability relating to environmental matters, illiquidity of real estate investments, and potential damages from natural disasters;

ˇ Impairments in the value of our real estate assets;

ˇ Changes in the tax laws of the United States of America;

ˇ The outcome of any legal proceedings to which we are a party; and

ˇ Acts of terrorism and war.

Additional factors that may cause risks and uncertainties include those discussed in the sections entitled "Business", "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date that this quarterly report was filed with the Securities and Exchange Commission, or SEC. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this quarterly report or to reflect the occurrence of unanticipated events. In light of these risks and uncertainties, the forward-looking events discussed in this quarterly report might not occur.

Realty Income Corporation, The Monthly Dividend CompanyŽ, is a Maryland corporation organized to operate as an equity real estate investment trust, or REIT. Our primary business objective is to generate dependable monthly cash distributions from a consistent and predictable level of funds from operations, or FFO per share. Our monthly distributions are supported by the cash flow from our portfolio of retail properties leased to regional and national retail chains. We have in-house acquisition, leasing, legal, retail and real estate research, portfolio management and capital markets expertise. Over the past 39 years, Realty Income and its predecessors have been acquiring and owning freestanding retail properties that generate rental revenue under long-term lease agreements (primarily 15 to 20 years).

In addition, we seek to increase distributions to stockholders and FFO per share through both active portfolio management and the acquisition of additional properties. Our portfolio management focus includes:

ˇ Contractual rent increases on existing leases;

ˇ Rent increases at the termination of existing leases, when market conditions permit; and

ˇ The active management of our property portfolio, including re-leasing vacant properties and selectively selling properties.

In acquiring additional properties, we adhere to a focused strategy of primarily acquiring properties that are:

ˇ Freestanding, single-tenant, retail locations;

ˇ Leased to regional and national retail chains; and

ˇ Leased under long-term, net-lease agreements.

At September 30, 2008, we owned a diversified portfolio:

ˇ Of 2,355 retail properties;

ˇ With an occupancy rate of 96.9%, or 2,282 properties occupied of the 2,355 properties in the portfolio;

ˇ With only 73 properties available for lease;

ˇ Leased to 118 different retail chains doing business in 30 separate retail industries;

ˇ Located in 49 states;

ˇ With over 19.2 million square feet of leasable space; and

ˇ With an average leasable retail space per property of approximately 8,150 square feet.

Of the 2,355 properties in the portfolio, 2,344, or 99.5%, are single-tenant, retail properties and the remaining 11 are multi-tenant properties. At September 30, 2008, 2,272 of the 2,344 single-tenant properties were leased with a weighted average remaining lease term (excluding extension options) of approximately 12.1 years.

In addition, at September 30, 2008, our wholly-owned taxable REIT subsidiary, Crest, had invested $6.0 million in five properties, which are classified as held for sale. Crest was created to buy and sell properties, primarily to individual investors who are involved in tax-deferred exchanges under Section 1031 of the Internal Revenue Code of 1986, as amended (the "Tax Code"). Crest also holds notes receivable of $22.4 million.

We typically acquire retail store properties under long-term leases with retail chain store operators. These transactions generally provide capital to owners of retail real estate and retail chains for expansion or other corporate purposes. Our acquisition and investment activities are concentrated in well-defined target markets and generally focus on retail chains providing goods and services that satisfy basic consumer needs.

Our net-lease agreements generally:

ˇ Are for initial terms of 15 to 20 years;

ˇ Require the tenant to pay minimum monthly rent and property operating expenses (taxes, insurance and maintenance); and

ˇ Provide for future rent increases based on increases in the consumer price index, fixed increases, or to a lesser degree, additional rent calculated as a percentage of the tenants' gross sales above a specified level.

Investment Philosophy
We believe that owning an actively managed, diversified portfolio of retail properties under long-term, net leases produces consistent and predictable income. Net leases typically require the tenant to be responsible for minimum monthly rent and property operating expenses including property taxes, insurance and maintenance. In addition, tenants are typically responsible for future rent increases based on increases in the consumer price index, fixed increases or, to a lesser degree, additional rent calculated as a percentage of the tenants' gross sales above a specified level. We believe that a portfolio of properties under long-term leases, coupled with the tenant's responsibility for property expenses, generally produces a more predictable income stream than many other types of real estate portfolios, while continuing to offer the potential for growth in rental income.

Credit Strategy
We generally provide sale-leaseback financing to less than investment grade retail chains. We typically acquire and lease back properties to regional and national retail chains and believe that within this market we can achieve an attractive risk-adjusted return on the financing we provide to retailers. Since 1970, our overall weighted average occupancy rate at the end of each year has been 98.5%, and the occupancy rate at the end of each year has never been below 97%.

Acquisition Strategy
We seek to invest in industries in which several, well-organized, regional and national retail chains are capturing market share through service, quality control, economies of scale, advertising and the selection of prime retail locations. We execute our acquisition strategy by acting as a source of capital to regional and national retail chain store owners and operators, doing business in a variety of industries, by acquiring and leasing back retail store locations. We undertake thorough research and analysis to identify appropriate industries, tenants and property locations for investment. Our research expertise is instrumental to uncovering net-lease opportunities in markets where our real estate financing program adds value. In selecting real estate for potential investment, we generally seek to acquire properties that have the following characteristics:

ˇ Freestanding, commercially-zoned property with a single tenant;

ˇ Properties that are important retail locations for regional and national retail chains;

ˇ Properties that we deem to be profitable for the retailers;

ˇ Properties that are located within attractive demographic areas relative to the business of their tenants, with high visibility and easy access to major thoroughfares; and

ˇ Properties that can be purchased with the simultaneous execution or assumption of long-term, net-lease agreements, offering both current income and the potential for rent increases.

Acquisitions During the Third Quarter of 2008 During the third quarter, Realty Income invested $4.3 million in retail properties. The Company invested $400,000 in one new convenience store property, with an initial lease term of 23.0 years and an average contractual lease yield of 10.1%, and funded $3.9 million in properties under development based on prior development agreements. All of the properties are 100% leased under net-lease agreements and the initial average contractual lease yield on third quarter real estate investments is 8.5%.

Acquisitions During the First Nine Months of 2008 During the first nine months of 2008, Realty Income invested $188.5 million in 108 new retail properties and properties under development with an initial weighted average contractual lease rate of 8.7%. These 108 properties are located in 14 states, will contain over 714,000 leasable square feet, and are 100% leased with an average lease term of 20.6 years. The 108 new properties acquired by Realty Income are net-leased to eight different retail chains in the following seven industries: automotive tire service, convenience store, drug store, financial service, motor vehicle dealership, restaurant and theater. There were no acquisitions by Crest in the first nine months of 2008.

At September 30, 2008, Realty Income had invested $917,000 in one property that was leased and being developed by the tenant (with development costs funded by Realty Income). Rent on this property is scheduled to begin in the next six months. At September 30, 2008, we had outstanding commitments to pay estimated unfunded development costs totaling approximately $1.6 million.

The initial weighted average contractual lease rate is computed as estimated contractual net operating income (in a net-leased property that is equal to the base rent or, in the case of properties under development, the estimated base rent under the lease) for the first year of each lease, divided by the estimated total costs. Since it is possible that a tenant could default on the payment of contractual rent, we cannot assure you that the actual return on the funds invested will remain at the percentages listed above.

$355 Million Acquisition Credit Facility In May 2008, we entered into a new $355 million acquisition credit facility which replaced our existing $300 million acquisition credit facility that was scheduled to expire in October 2008. The term of the new credit facility is for three years until May 2011, plus two, one-year extension options. Under the new credit facility, our investment grade credit ratings provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 100 basis points with a facility fee of 27.5 basis points, for all-in drawn pricing of 127.5 basis points over LIBOR. We also have other interest rate options available to us.

Issuance of Common Stock
In September 2008, we issued 2,925,000 shares of common stock at a price of $26.82 per share. The net proceeds of $74.5 million will be used, along with our available cash on hand and, if necessary, draw-downs on our credit facility, to repay the $100 million outstanding principal amount of our 8.25% Monthly Income Senior Notes, which come due in November 2008, and to repay the $20 million outstanding principal amount of our 8% Notes, which come due in January 2009.

Investments in Existing Properties
In the third quarter of 2008, we capitalized costs of $560,000 on existing properties in our portfolio, consisting of $256,000 for re-leasing costs and $304,000 for building improvements.

In the first nine months of 2008, we capitalized costs of $1.7 million on existing properties in our portfolio, consisting of $657,000 for re-leasing costs and $1.1 million for building improvements.

Net Income Available to Common Stockholders Net income available to common stockholders was $28.6 million in the third quarter of 2008 versus $27.9 million in the same quarter of 2007, an increase of $0.7 million. On a diluted per common share basis, net income was $0.29 per share in the third quarter of 2008 compared to $0.28 in the third quarter of 2007.

Net income available to common stockholders was $79.3 million in the first nine months of 2008 versus $89.0 million in the same period of 2007, a decrease of $9.7 million. On a diluted per common share basis, net income was $0.79 per share in the first nine months of 2008 compared to $0.89 per share in the first nine months of 2007.

The calculation to determine net income available to common stockholders includes gains from the sales of properties. The amount of gains varies from period to period based on the timing of property sales and can significantly impact net income available to common stockholders.

The gain recognized from the sales of investment properties during the third quarter of 2008 was $5.7 million, as compared to a $799,000 gain recognized from the sales of investment properties during the third quarter of 2007. The gain recognized during the first nine months of 2008 from the sales of investment properties and from the additional proceeds received from a sale of excess land was $9.4 million, as compared to a $3.2 million gain recognized from the sales of investment properties for the first nine months of 2007.

Funds from Operations (FFO)
In the third quarter of 2008, our FFO decreased by $0.9 million, or 1.9%, to $45.7 million versus $46.6 million in the third quarter of 2007. On a diluted per common share basis, FFO was $0.46 in the third quarter of 2008 compared to $0.47 in the third quarter of 2007, a decrease of $0.01, or 2.1%.

In the first nine months of 2008, our FFO decreased by $3.4 million, or 2.4%, to $138.5 million versus $141.9 million in the first nine months of 2007. On a diluted per common share basis, FFO was $1.38 in the first nine months of 2008 compared to $1.41 in the first nine months of 2007, a decrease of $0.03, or 2.1%.

See our discussion of FFO later in this Management's Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation of net income available to common stockholders to FFO.

Crest's Property Sales
During the third quarter of 2008, Crest sold three properties from its inventory for an aggregate of $4.6 million, which resulted in a gain of $199,000. During the first nine months of 2008, Crest sold 25 properties for an aggregate of $50.7 million, which resulted in a gain of $4.6 million. Crest's gains are included in "income from discontinued operations, real estate acquired for resale by Crest" on our consolidated statements of income.

Crest's Property Inventory
At September 30, 2008, Crest had $6.0 million invested in five properties. At December 31, 2007, Crest's property inventory totaled $56.2 million in 30 properties. These properties are included in "real estate held for sale, net" on our consolidated balance sheets.

Increases in Monthly Distributions to Common Stockholders We continue our 39-year policy of paying distributions monthly. Monthly distributions per share were increased in October 2008 by $0.000625 to $0.141125. The increase in October 2008 was our 44th consecutive quarterly increase and the 51st increase in the amount of our dividend since our listing on the New York Stock Exchange, or NYSE, in 1994. In the first nine months of 2008, we paid three monthly cash distributions per share in the amount of $0.13675, three in the amount of $0.137375, two in the amount of $0.138 and one in the amount of $0.1405, totaling $1.238875. In September 2008 and October 2008, we declared distributions of $0.141125 per share, which were paid in October 2008 and will be paid in November 2008, respectively.

The monthly distribution of $0.141125 per share represents a current annualized distribution of $1.6935 per share, and an annualized distribution yield of approximately 8.2% based on the last reported sale price of our common stock on the NYSE of $20.63 on October 22, 2008. Although we expect to continue our policy of paying monthly distributions, we cannot guarantee that we will maintain our current level of distributions, that we will continue our pattern of increasing distributions per share, or what our actual distribution yield will be in any future period.

Matters Pertaining to a Certain Tenant
On January 22, 2008, Buffets Holdings, Inc. ("Buffets Holdings") together with each of its subsidiaries, filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Realty Income owned 116 properties and Crest owned three properties leased to subsidiaries of Buffets, Inc. ("Buffets") and guaranteed by Buffets. Buffets is a subsidiary of Buffets Holdings. In February 2008, Buffets Holdings elected to reject the leases for 12 properties owned by Realty Income and two properties owned by Crest, and returned those 14 properties to us. In July 2008, Realty Income reached an agreement with Buffets Holdings for the continued lease of all of its remaining properties. The terms of the agreement were approved by the Bankruptcy Court on September 15, 2008. Under the terms of the agreement, all 105 of the remaining leases, including 104 owned by Realty Income and one owned by Crest, will be assumed and continue to be operated by Buffets Holdings. Rents will be modified, for the 104 Realty Income properties, from an annualized rent of $22.4 million to $19.4 million, or 87% of previous rents. In addition, the majority of the leases call for annual increases in rent. Buffets Holdings continues to be our largest tenant and represents approximately 5.9% of Realty Income's annualized lease revenue as of September 30, 2008.

Cash Reserves
We are organized to operate as an equity REIT that acquires and leases properties and distributes to stockholders, in the form of monthly cash distributions, a substantial portion of our net cash flow generated from leases on our retail properties. We intend to retain an appropriate amount of cash as working capital. At September 30, 2008, we had cash and cash equivalents totaling $112.6 million, a portion of which represents the net proceeds of $74.5 million from the September 2008 issuance of common stock.

We believe that our cash and cash equivalents on hand, cash provided from operating activities and borrowing capacity is sufficient to meet our liquidity needs for the foreseeable future. We intend, however, to use additional sources of capital to fund property acquisitions and to repay future borrowings under our credit facility.

$355 Million Acquisition Credit Facility In May 2008, we entered into a new $355 million revolving, unsecured credit facility which replaced our existing $300 million acquisition credit facility that was scheduled to expire in October 2008. The term of the new credit facility is for three years until May 2011, plus, two, one-year extension options. Under the new credit facility, our investment grade credit ratings provide for financing at the London Interbank Offered Rate, commonly referred to as LIBOR, plus 100 basis points with a facility fee of 27.5 basis points, for all-in drawn pricing of 127.5 basis points over LIBOR. We also have other interest rate options available to us. At October 22, 2008, we had a borrowing capacity of $355 million available on our new credit facility and no outstanding balance.

We expect to use our credit facility to acquire additional retail properties and for other corporate purposes. Any additional borrowings will increase our exposure to interest rate risk. We have the right to request an increase in the borrowing capacity of the credit facility by up to $100 million, to a total borrowing capacity of $455 million. Any increase in the borrowing capacity is subject to approval by the lending banks on our credit facility.

Mortgage Debt
We have no mortgage debt on any of our properties.

Universal Shelf Registration
In April 2006, we filed a shelf registration statement with the SEC, which is effective for a term of three years. In accordance with SEC rules, the amount of the securities to be issued pursuant to this shelf registration statement was not specified when it was filed. The securities covered by this registration statement include common stock, preferred stock, debt securities, or any combination of such securities. We may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering. There is no specific limit to the dollar amount of new securities that can be issued under this new shelf registration before it expires in April 2009, and our common stock, preferred stock and notes issued after April 2006 were all issued pursuant to this universal shelf registration statement.

Conservative Capital Structure
We believe that our stockholders are best served by a conservative capital structure. Therefore, we seek to maintain a conservative debt level on our balance sheet and solid interest and fixed charge coverage ratios. At October 22, 2008, our total outstanding credit facility borrowings and outstanding notes were $1.47 billion or approximately 37.0% of our total market capitalization of $3.97 billion.

We define our total market capitalization at October 22, 2008 as the sum of:

ˇ Shares of our common stock outstanding of 104,268,123 multiplied by the last reported sales price of our common stock on the NYSE of $20.63 per share on October 22, 2008, or $2.15 billion;

ˇ Aggregate liquidation value (par value of $25 per share) of the Class D preferred stock of $127.5 million;

ˇ Aggregate liquidation value (par value of $25 per share) of the Class E preferred stock of $220 million; and

ˇ Outstanding notes of $1.47 billion.

Historically, we have met our long-term capital needs through the issuance of common stock, preferred stock and long-term unsecured notes and bonds. Over the long term, we believe that common stock should be the majority of our capital structure, however, we may issue additional preferred stock or debt securities from time to time. We may issue common stock when we believe that our share price is at a level that allows for the proceeds of any offering to be accretively invested into additional properties. In addition, we may issue common stock to permanently finance properties that were financed by our credit facility or debt securities. However, we cannot assure you that we will have access to the capital markets at terms that are acceptable to us.

Credit Agency Ratings
We are currently assigned investment grade corporate credit ratings on our senior unsecured notes. Fitch Ratings has assigned a rating of BBB+, Moody's Investors Service has assigned a rating of Baa1 and Standard & Poor's Ratings Group has assigned a rating of BBB to our senior notes. The ratings by Standard & Poor's, Fitch and Moody's have "stable" outlooks.

We have also been assigned credit ratings on our preferred stock. Fitch Ratings has assigned a rating of BBB, Moody's has assigned a rating of Baa2 and Standard & Poor's has assigned a rating of BB+ to our preferred stock. The ratings by Standard & Poor's, Fitch and Moody's have "stable" outlooks.

The credit ratings assigned to us could change based upon, among other things, our results of operations and financial condition. These ratings are subject to ongoing evaluation by credit rating agencies and we cannot assure you that any rating will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. Moreover, a rating is not a recommendation to buy, sell or hold our debt securities, preferred stock or common stock.

Notes Outstanding
Our senior unsecured note obligations consist of the following as of September
30, 2008, sorted by maturity date (dollars in millions):

  8.25% notes, issued in October 1998 and due in November 2008       $   100.0
  8% notes, issued in January 1999 and due in January 2009                20.0
  5.375% notes, issued in March 2003 and due in March 2013               100.0
  5.5% notes, issued in November 2003 and due in November 2015           150.0
  5.95% notes, issued in September 2006 and due in September 2016        275.0
  5.375% notes, issued in September 2005 and due in September 2017       175.0
  6.75% notes, issued in September 2007 and due in August 2019           550.0
  5.875% bonds, issued in March 2005 and due in March 2035               100.0
                                                                     $ 1,470.0

All of our outstanding notes and bonds have fixed interest rates.

We plan to use our available cash on hand and, if necessary, draw-downs on our credit facility, to repay the $100 million outstanding principal amount of our 8.25% Monthly Income Senior Notes, which come due in November 2008, and to repay the $20 million outstanding principal amount of our 8% Notes, which come due in January 2009.

Interest on all of our senior note obligations is paid semiannually, with the exception of the interest on the 8.25% senior notes issued in October 1998, which is paid monthly. All of these notes contain various covenants, including:
(i) a limitation on incurrence of any debt which would cause our debt to total adjusted assets ratio to exceed 60%; (ii) a limitation on incurrence of any secured debt which would cause our secured debt to total adjusted assets ratio . . .